Minding Ag's Business
Dazed by Capital Gains Rates
If you're confounded by income tax changes under the new tax changes, you're not alone. Capital gains rates may be one of the more convoluted calculations you'll need to consider starting in 2013.
Paul Neiffer, a CPA who specializes in agriculture and cooperative taxes for CliftonLarsonAllen LLC, points out that your personal capital gains rate will no longer depend just on your taxable income (after deductions). Now that a new 3.8% Medicare surtax rate kicks in on those with adjusted gross income of $200,000 single/$250,000 married, there are really six possible capital gains rates depending on your personal circumstances.
This matters to farmers and landowners because the sale of highly appreciated property can easily tip them into the highest brackets. So while the new tax law passed New Year's Day is advertised as raising capital gains to 20% for "wealthy" taxpayers, some may see capital gains rates closer to 25%, or a 66% capital gains tax increase compared to last year.
Here's how Neiffer describes the options in one of his recent FarmCPAToday posts:
--For many lower income and middle income taxpayers who are in the 15% or lower income tax bracket, their capital gains will be taxed at zero.
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--For most middle income taxpayers their capital gains tax rate will be a maximum of 15% (probably for income in the range of $90,000 to $200,000 single/$250,000 married.)
--For some middle income taxpayers whose adjusted gross income (not taxable income) exceeds $200,000/$250,000, their capital gains tax rate will be 18.8%, which is the 15% capital gains rate plus the new 3.8% Medicare surtax rate on investment income including capital gains.
--For some of these same middle income taxpayers who have major itemized deductions, each dollar of additional capital gains will wipe out part of their itemized deductions. This will increase their capital gains rate to about 20%.
--For those tax payers who are now in the highest marginal tax rate of 39.6% ($400,000 single/$450,000 married taxable income) with limited itemized deductions, their capital gains rate will be 23.8%, the maximum capital gains tax rate of 20% plus the Medicare surtax rate of 3.8%.
--Finally, those taxpayers in the highest tax bracket with itemized deductions, their maximum capital gains rate (and qualified dividend) rate will be about 25%. This is equal to the maximum capital gains rate of 20%, plus the Medicare surtax rate of 3.8%, plus about 1.2% for the phase-out of their itemized deductions.
Keep in mind these new federal rates don't count the misery of state taxes that often don't treat capital gains just like regular income. New York, for example, can add 9% for good measure.
The effect of higher capital gains could be to encourage elderly landowners to hold on to property rather than sell for cash now. Estate tax law forgives all capital appreciation on property held during your lifetime. So Grandma who owns Iowa farmland acquired in the 1940s at $100/acre, could have her capital gains bill on today's $9,000 farmland forgiven if she leaves it to her heirs.
To see how you fare under the new tax laws, play with the Tax Foundation's fiscal cliff tax calculator at http://interactive.taxfoundation.org/…
Follow me on Twitter@MarciaZTaylor.
(SK/CZ)
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